I am pleased to set out the Scottish Government’s second annual medium-term financial strategy. When I made the equivalent statement a year ago, I noted that Scotland’s public finances were set in the context of continuing United Kingdom Government austerity, Brexit uncertainty and an inhumane, hostile approach to immigration. I am disappointed to say that those issues still set the context for our public finances.
This is a time of unprecedented austerity. At the end of last year, UK public spending as a share of national income had fallen for a ninth successive year—the only time that that has happened since the second world war. The Resolution Foundation has highlighted that that particularly affects low and middle-income households. Between 2010-11 and 2019-20, our block grant for day-to-day spending has fallen by £2 billion. The decision of successive chancellors to pursue a path of austerity means that over £12 billion less has been invested in Scottish public services over the past nine years.
Let me be clear: austerity is a choice, and it is not one of Scotland’s making. The UK Government’s policy of austerity is both unnecessary and counterproductive. Leaving the European Union is not in Scotland’s interests, either. It is also not Scotland’s will. Uncertainty is leading to subdued growth, and leaving the EU will compound that impact. The effect of leaving the EU is clearly seen in the economic forecasts for Scotland, with growth forecast to fall from 1.3 per cent in 2018 to 0.8 per cent in 2019.
The growth forecast has been downgraded, and the Scottish Fiscal Commission is clear that that is directly related to the on-going uncertainty created by the UK’s European Union negotiation process. The commission highlights that the uncertainty caused by Brexit has prevented it from revising up its outlook for the Scottish economy and that, as a result, it expects business investment to continue to fall in 2019 and 2020, limiting growth in the economy. Let that sink in for a second. The independent forecasters of our economy have said that, if it were not for continued Brexit uncertainty, they would be forecasting faster, not slower, economic growth. There is now no doubt that Brexit is hurting Scotland before it has even happened.
During the 2014 to 2020 EU budget round, Scotland is estimated to receive more than £5 billion in funding from the EU—supporting jobs, delivering infrastructure, sustaining rural communities and delivering research funding for our universities. The absence of firm commitments means that we cannot yet quantify levels of funding in the future or the impact that that will have on the Scottish budget. However, the Scottish Government has made it clear that, given that Scotland voted overwhelmingly against leaving the EU, funding levels should not be reduced as a result of the UK’s exit, nor should those funds be centralised in London.
Against that backdrop of UK austerity and uncertainty, we are committed to using our powers in a balanced and responsible way to stimulate the economy, protect public services and provide people and businesses with as much certainty as possible. Decisions made in the 2019-20 budget ensure that, in 2019-20, 55 per cent of income tax payers in Scotland will continue to pay less than people who earn the same income in the rest of the UK, although the revenue needed to support investment in the Scottish economy and public services will still be raised. Had we applied UK income tax policy in 2019-20, we would have had more than £500 million less to spend.
Growing and supporting the economy is essential for financial stability and for providing the resources for our public services. Our economic action plan sets out the actions that will deliver sustainable inclusive growth, improve wellbeing and attract investment across Scotland. More than £1 billion has been committed to city region and growth deals over the next 10 to 20 years, and the aim is to ensure that, through 100 per cent coverage, every part of Scotland will benefit.
We have recently introduced the legislation that will underpin the Scottish national investment bank—an institution that will help to shape our economy through mission-led, patient investments. Under the national infrastructure mission, annual infrastructure investment will be £1.56 billion higher in 2025-26 than the £5.2 billion that we are already investing in 2019-20. Today, I confirm that I have accepted the recent recommendation of the Scottish Futures Trust to adopt the mutual investment model as one means of supporting infrastructure spending, which will extend the range of tools at our disposal with which to provide crucial capital investment for Scotland.
Alongside the medium-term financial strategy, the Scottish Fiscal Commission has published new economic and fiscal forecasts. As I said, the negative economic impact of leaving the EU is clearly demonstrated in the forecasts, with economic growth forecast to fall from 1.3 per cent in 2018 to 0.8 per cent in 2019. However, the forecasts also point to a resilient Scottish economy, with employment rising further over the next five years, unemployment remaining at near record lows and earnings accelerating.
The SFC has also produced updated income tax forecasts. Relative to the SFC’s December forecast, those have increased in every year from 2018-19 over the forecast period. For 2019-20, the forecast of income tax revenues has risen by £20 million, driven largely by an improved outlook for earnings. However, forecasts for the block grant adjustment that is deducted from the budget each year have gone up by even more. That means that, on the basis of current estimates, the net contribution of income tax to the 2019-20 funding envelope is about £188 million smaller than was forecast in December. That position is indicative; the 2020-21 budget will be determined by the next round of forecasts by the SFC and the Office for Budget Responsibility, in the autumn.
In this medium-term financial strategy, I have set out a set of principles and policies that will guide the use of our borrowing and reserve powers. Decisions are guided by the principles of sustainability, stability, budget flexibility, intergenerational fairness, value for money and transparency. However, I should make it clear that the circumstances that determine the use of our powers will often depend on factors that are beyond our control. UK Government spending decisions continue to be the main factor that determines the Scottish budget.
On capital borrowing, the MTFS sets out plans to borrow £450 million this year and £350 million next year. Our policy is to borrow between £250 million and £450 million annually over the remaining period of the national infrastructure mission to ensure that overall investment increases year on year. To ensure flexibility to undertake capital borrowing when it might be most needed, a contingency of £300 million of the capital borrowing limit will be left unused. That strikes the right balance between supporting the economy and using prudently the restrictive borrowing powers that the fiscal framework contains.
I will turn to the framework for the spending review. The UK chancellor committed to a spending review this summer, but, given the continuing uncertainty over Brexit and the impending change of Prime Minister, it is unclear whether that spending review will take place—as is the case with most things that relate to the UK Government. Nonetheless, to reflect the importance of sustainable public finances, the Scottish Government plans to undertake reviews of spending beyond 2020-21. We will fulfil the commitment that we made during the 2019-20 budget to bring forward a three-year settlement for local government in 2020-21. In line with the national performance framework, the spending review will focus on creating a more successful country, with opportunities for all of Scotland to flourish through increased wellbeing and sustainable and inclusive economic growth. It will be driven by a strategic focus on addressing Scotland’s long-term challenges.
For resource, we plan to publish indicative budgets in December 2019 alongside the Scottish budget for 2020-21. However, if we do not have sufficient clarity from the UK Government on its spending plans, that might not be possible. We will expect resource spending proposals to focus on outcomes and to evidence, as far as possible, their impact on the challenges and opportunities that we face in securing sustainable and inclusive economic growth; improving national wellbeing; combating child poverty and meeting our statutory targets; and tackling climate change and the climate crisis. For capital, future budgets will be published by June 2020, to take account of the infrastructure commission’s findings, which are to be reported at the end of December 2019, and the Scottish Government’s next infrastructure investment plan, which will be informed by the commission’s advice.
It is clear from what I have said that the resources that are available to the Scottish Government will be constrained by continued UK austerity. We recognise that we will not be able to do all that we want to do or all that others want us to do. Prioritisation will be necessary to focus resource where it will have the biggest impact. Therefore, I look forward to a responsible debate on how best to deliver that outcome and I commend the medium-term financial strategy to the Parliament.